SBA Loans
What is An SBA Loan?
A Small Business Administration (SBA) Loan is a federal government-backed business financing originated by private lenders and banks. These loans are popular and highly coveted among small business owners because they come with high loan amounts, low rates, and long repayment periods. In most cases, the loan term can go as long as 25 years, depending on the purpose of the loan.
SBA Loans are notorious for having a lengthy and document-intensive application process. The document retrieval for the loan alone takes half of the application time, and it’s often a deal-breaker for those who wish to have access to funds ASAP. However, for patient applicants, the effort may well be worth it because of the benefits the loan offers.
Because these are long-term loans with guarantees, every dollar must be earmarked and the purpose of the funds must be documented at every step. And the process of identifying how the money will be spent takes a lot of time.
Loan Amounts
$100,000 – $10,000,000
Rates
Starting at 6.25%
Speed
Less than 30 days
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How Do SBA Loans Work?
SBA loans are government-backed loans provided by banks and other lending institutions to help small businesses qualify for bank-rate financing. The Small Business Administration (SBA) does not provide the loan directly but guarantees up to 85% of the loan. This reduces the risk for lenders, allowing businesses to access financing with more favorable terms, such as longer repayment periods, lower interest rates, and higher loan amounts
How To Get An SBA Loan
To get an SBA loan, you need to find an SBA-accredited lender, either banks, credit unions, or alternative lenders. You will have to provide the necessary financial documentation, such as tax returns, financial statements, business plans, and more.
The lender will then review the application and, if approved, submit it to the SBA for final approval. Once the SBA approves your application, they will guarantee a portion of the loan.
The SBA requires an unconditional personal guarantee if you own 20% of the business. This means your assets are on the line if your business cannot repay the loan.
Your lender handles loan closing and fund disbursements, and you pay them directly, following the repayment term schedule.
How Can You Use an SBA Loan?
One of the major characteristics of SBA-guaranteed loans that make these loans desirable for small business owners is the flexibility offered while utilizing the funds. From investment capital and disaster relief to loans for startup or expansion, owners use the SBA-backed financing for a variety of business initiatives.
For example, imagine a small business that has some debt, but the owner wants to expand in order to supply more customers and pick up more clients to earn more revenue. These kinds of short-term debts, like money owed to vendors or credit card debt, shouldn’t have to limit the capabilities to grow a business. In these types of situations, SMEs often utilize sba-guaranteed loans to refinance their debts and invest into their business. Through refinancing, businesses have the opportunity to adjust their payments and make their operating costs more manageable over time.
Because of the variety of loan programs and the range of uses for the different loan products, business owners use SBA small business loans for all sorts of business expenses. Some of the most popular uses for SBA loans for small businesses are acquisition financing, debt consolidation, equipment refinancing, working capital, business expansion, and partner buyouts.
SBA Acquisition Financing
Loans offered by the Small Business Administration are frequently used for business acquisitions. Through the SBA-guaranteed financing you can purchase a new company or a competitor. For acquisition financing, the SBA require that there is a minimum of 10% equity being used for the acquisition. Although this is the case, most SBA-affiliated lenders will require closer to 15-20% of equity to be used for business acquisition financing.
SBA Debt Consolidation Loan
Debt consolidation is one of the most common reasons why small businesses to utilize SBA loan programs. Companies, especially ones that have short-term debts, like equipment loans or leases, lines of credit, truck loans, merchant cash advances, or other money owed, can refinance and stretch their debt payments over 10 years with an SBA loan. By using an SBA Loan for debt consolidation, small businesses are able to dramatically reduce their monthly debt payments. This results in a significantly more cash flow for day-to-day operations and makes managing debt much easier for small business owners.
SBA Equipment Loan
Many businesses require equipment to operate efficiently. However, equipment purchases can be one of the biggest investments a business has to make. Sometimes, businesses do not have the capital required to purchase equipment outright. On the other hand, the financing offered by the SBA gives businesses the money they need to purchase heavy machinery and other essential tools. With lower rates, repayments become more manageable for the business.
SBA Working Capital Loan
One barrier that a lot of small business owners experience is limited working capital. Business owners can also turn to the Small Business Administration if they need additional working capital for their business. Traditional bank programs will require that term loans are used for specific purchases or to refinance existing debt, however, the SBA allows small business owners to inject the full loan amount into their bank accounts to fund future operations or immediate working capital needs.
SBA Business Expansion Loan
Another purpose of the SBA-guaranteed financing is business expansion. Expansion can help a small business accelerate growth plans. With the financial resource, businesses receive financial assistance to execute their growth plans without worrying about having enough cash flow. By using an SBA loan to expand a small business, the business owner can:
- Acquire additional businesses
- Purchase or update equipment
- Hire more employees for the expansion
- Open new locations
- Purchase commercial real estate
- Create new products
SBA Partner Buyout Loan
Using an SBA Loan to buy out an existing partner is a great way to use long-term financing to own a larger percentage of the company. Many small business owners utilize this financial resource for partner buyout, and gain a stake in their company that they otherwise wouldn’t have been able to afford. Similar to some of the other reasons why small businesses would use an SBA Loan, having a 10-year term to utilize the funds enable some owners to buy out a partner and be able to sustain the payments in addition to the existing cash flow for the business.
What Are the Different Types of SBA Loans?
SBA Loans Summarized
| SBA 7(a) Loan Amounts | SBA 7(a) Loan Terms | SBA 7(a) Loan Rates |
|---|---|---|
| $100,000 to $5,000,000 | 7 to 25 years | Prime + 1% to 2.75% |
| SBA 504 Loan Amounts | SBA 504 Loan Terms | SBA 504 Loan Rates |
|---|---|---|
| $500,000 to $20,000,000 | 10 to 30 years | 4.92% to 5.22% |
| SBA Disaster Loan Amounts | SBA Disaster Loan Terms | SBA Disaster Loan Rates |
|---|---|---|
| Up to $2,000,000 | Up to 30 years | 4% to 8% |
| SBA Express Loan Amounts | SBA Express Loan Terms | SBA Express Loan Rates |
|---|---|---|
| Up to $350,000 | 7 to 35 years | Prime + 4.5% to 6.5% |
| SBA Microloan Amounts | SBA Microloan Terms | SBA Microloan Rates |
|---|---|---|
| $500 to $50,000 | Up to 6 years | 8% to 13% |
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What Are the Benefits of SBA Loans?
Unlike traditional loan options, SBA loans are designed specifically for small firms. That said, it offers benefits that traditional loans or non SBA-backed loans don’t offer.
The SBA directly targets small business owners for the SBA loan programs, providing flexibility and options that are helpful for smaller companies. For example, an SBA loan can be used for an array of expenses. The SBA goes so far as to say that funds from SBA loans can be used for “most” businesses purposes – which includes SBA startup loans, loans for expansion, equipment purchasing, working capital, inventory, SBA business loans, or SBA real estate loans.
One of the biggest benefits of SBA loans is that the loans are secured through the SBA guanratee. This provides a major incentive for lenders to offer SBA loans to small business owners. SBA agencies guarantee a majority of the loan amount for the lender, which reduces their risk and allows them to continue supporting small business owners. This leads to a higher likelihood of finding a lender that can successfully approve your SBA application.
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What Type of Collateral Can You Use for SBA Loans?
One of the downfalls of SBA loan programs is that small businesses will often have to put up collateral to secure their loan. While this might be intimidating for some small business owners or first time SBA loan applicants, there are many different types of collateral available that can help to secure an SBA loan. Many of these types of collateral are things that are already ready and available just from operating a small business.
A wide range of collateral can be used to secure an SBA Loan. While different asset classes are considered, some will hold more value than others. Some of the types of collateral that can be used for SBA loans are: machinery and equipment; accounts receivable; inventory; commercial real estate; residential real estate; investment properties; and marketable securities.
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What Types of Documents Do You Need to Get an SBA Loan?
The below forms are necessary to process an SBA Loan Application, but additional documentation will be required. – SBA form 1919 and 1920
Downloadable SBA Forms (SBA form 1919 and sba form 1920)
SBA 7(a) Loan Application Documents – SBA 504 Loan Application Documents – SBA Disaster Loan
Application Documents – SBA Express Loan Application Documents – SBA Microloan Loan
Application Documents – SBA form 1919 and 1920
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SBA Form 1919 and SBA Form 1920
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Profit and Loss Statements (prior 3 years)
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Current Balance Sheet
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Current A/R Aging Report
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Current A/P Aging Report
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Business Debt Schedule
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Environmental Questionnaire
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Complete Business Plan
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2 Years of Business Projections
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How to Apply for SBA Loans
Small business owners often ask how to apply or how to qualify for an SBA business loan. Because these are longer-term loans, there is a deeper background and credit check compared to other small business loans.
When looking into how to get an SBA loan, business owners need to gather documentation and evidence that their small business will be alive and healthy for over 10 years. They may also have to pledge collateral to secure the loan.
As for the document requirements, business owners will also need to provide the following:
- Personal identification
- Business certificate or license
- Proof that they are the owner of the small business
- Business financials
- Tax returns for the last two years for the small business and for the business owner’s personal taxes
- History of past loan decisions or applications
If a small business can provide all of this information and can demonstrate strong health, has a good borrowing history, show good credit, present a profitable business plan, and show that they are making money and will be able to pay off the loan, then they should be ready for application.
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FAQ
An SBA Loan is a loan that is originated through private lenders and banks that is guaranteed by the Small Business Administration. SBA Loans have terms of 10 and 25 years and are used for an array of different reasons.
The application process for an SBA Loan varies depending on both the type of SBA loan the business is applying for and how organized the businesses’ financial are. Working directly with a lender that specializes in SBA Loan lending will help expedite a long and document -intensive process.
SBA Loans are used for a wide range of different functions by businesses in a plethora of industries. Businesses use SBA-backed loans for Expansion, Debt Consolidation, Working Capital, Acquisitions, and Equipment Refinancing.
Obtaining an SBA loan requires an intensive document process and can take anywhere from 30 to 120 days depending on if the business is working with a bank or direct lender. Banks typically move slower, while private lenders that specialize in SBA loans can expedite the process to close in about 30 days. Each situation is different and is dependent on the dollar amount of the loan, the use of funds, and the terms.
There is a wide range of collateral that can be used to secure an SBA Loan. Some of the more common types of collateral used for SBA Loans include Equipment, Commercial Real Estate, Residential Real Estate, and Inventory.
Although the SBA 7(a) loan program and the SBA 504 Loan are the most common SBA Loans, there are 3 other SBA Loans. The SBA Disaster Loan, SBA Express Loan, and SBA Microloan Program all have different uses that businesses utilize.